Rifn et al. Economic Structures (2020) 9:26 https://doi.org/10.1186/s40008-020-00202-8

RESEARCH Open Access Assessing the impact of limiting Indonesian exports to the European Union

Amzul Rifn*, Feryanto, Herawati and Harianto

*Correspondence: [email protected] Abstract Department of Agribusiness, The latest challenge faced by the Indonesian palm oil industry concerns the Delegated Faculty of Economics and Management, Act that has been adopted to limit the use of palm oil in biofuels because palm oil is Agricultural University, Bogor, considered to not support the sustainable development program. The objective of this article is to assess the suspension of Indonesia’s palm exports to the European Union in terms of Indonesia’s economic conditions. The Global Trade Analysis Project (GTAP) model is used to assess the impact, and the results indicate that the suspension will not create signifcant impacts on the economic growth, GDP, macro-welfare, and exports and imports of Indonesia. Keywords: Palm oil, European Union, Import

1 Introduction Indonesian exports reached US$ 168.8 billion in 2017, an increase of 16.8% compared to the previous year (UN Comtrade 2018). One of the largest contributors to these exports is palm oil, amounting to 13.6% in 2017. Indonesian palm oil exports in 2017 reached US$ 22.97 billion, an increase of 26% compared to the value in 2016 (UN Comtrade 2018). In 2017, Indonesia exported approximately 29 million tons of palm oil, with the largest destination countries including , with a market share of 25.37%; followed by the European Union, with 14.35%; and , with 12.39% (UN Comtrade 2018). Dif- ferent from India and China, which directly consumed its palm oil, European market besides consumed directly it also serve as a trade hub for other countries in the region (Rifn 2013). For a long time, countries of the European Union, particularly the , have been the major market destination for Indonesian palm oil as well as being countries that connect Indonesia and other European countries. However, there have been many instances in the last several years where oil imports, mainly from Indo- nesia, have been hindered from entering European countries. Several issues, includ- ing health, environment, and animal protection, have been considered to hamper the entrance of Indonesian palm oil to Europe. Tis is confrmed by the Report on Palm Oil and Deforestation on Rainforests, which stated that palm oil is a very large prob- lem related to the issue of corruption, child labor, violation of human rights, omis- sion of the rights of indigenous people, and a trigger to deforestation and habitat

© The Author(s) 2020. This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativeco​ ​ mmons.org/licen​ ses/by/4.0/​ . Rifn et al. Economic Structures (2020) 9:26 Page 2 of 13

destruction (European Parliament 2017). One of resolutions and recommendations given is to stop Crude Palm Oil (CPO) imports (including from Indonesia) in 2021. Moreover, the framework of the Renewable Energy Directive (RED) regulates renew- able energy use in the European Union, where CPO is phased out as the source of biofuel due to its high emission level, although it is yet to be fnalized. On the other hand, the data of Indonesian palm oil exports to the European Union showed that the need and demand for Indonesian palm oil continued to increase through the years. In 2016–2017, demand for Indonesian palm oil in the European Union mar- ket increased by 15%, and during 1996–2016, palm oil consumption in the European Union increased by 31% (UN Comtrade 2018). Tis condition indicates that European Union countries necessarily need palm oil for their industry. In addition, in May 2019 the European Commission has adopted the Delegated Act to limit the use of biofuels from palm oil which has indirect land-use change (ILUC) risks. Indonesia has tried to undertake various diplomatic approaches to explain this prob- lem, yet issues regarding palm oil continue to appear and develop. Terefore, the dis- course to halt Indonesian palm oil exports to European countries ultimately prevails. By suspending Indonesian palm oil exports to European countries, Indonesia will escape criticism from many parties in Europe and can focus on developing a sustainable palm oil system based on the national law and sustainable development goals (SDGs). Based on this background, it is important to conduct a study aimed to observe and discuss the impact of palm oil export suspension to European Union on Indonesia. Several previous studies showed that palm oil has an important contribution to the Indonesian economy; therefore, disruption in this sector will afect the other sec- tors. Susila (2004) specifcally analyzed the Indonesian palm oil sector and found that it contributed to economic growth, poverty alleviation, and income distribution within society. Te contribution of the palm oil sector was shown by the growth, , output, and foreign exchange earnings; it has also contributed to household revenue, playing a role in increasing household assets. In terms of poverty alleviation, the palm oil sector has contributed to income distribution within the society. Te same result was obtained by Edwards (2015), who showed that expansion of palm oil’s share of land in the ten districts that experienced the largest expansion would decrease poverty rate and narrow the income gap. Edwards (2019) estimates that the palm oil industry has suc- ceeded in lifting 2.6 million rural from poverty. At the regional level, Gatto et al. (2017) showed that contracts between smallholder palm oil farmers and private or state-owned companies signifcantly contributed to the regional economy especially at the village level in the form of infrastructure built by the companies; these not only ben- efted contract farmers but also noncontract farmers. Perwitasari and Sari (2013) analyzed the impact of palm oil to the Indonesian economy using Input–Output table. Te authors reveal that palm oil output multiplier is higher compared to the average of all sectors meanwhile the income, labor and value-added multiplier are lower compared to the average of all sectors. Susila et al. (2007) analyzed the role of the plantation industry on the growth and economic inequality using the social accounting matrix (SAM) approach. Te authors showed that the palm oil and cooking oil sectors were found to be the largest sectors contributing to economic growth, , and income distribution. Rifn et al. Economic Structures (2020) 9:26 Page 3 of 13

Susila and Munadi (2008) showed the impact of the development of the CPO-based biofuel industry on poverty. Te development of the CPO-based biofuel industry will decrease the number of poor people, particularly those who live around the oil palm plantation. However, the development of CPO-based biofuels will also increase the price of cooking oil consumed by poor people, thus increasing their number. At a micro-level, Rist et al. (2010) used primary data to show that small farmers will be able to gain proft through a high rate of return from land and labor by doing business in oil palm commodities. Feintrenie et al. (2010) also showed that oil palm was more ben- efcial compared to rubber and rice. A number of researchers also analyzed the impact of decreasing number of exports on the economy of Indonesia. Wibowo (2013) showed that declining exports in the min- ing and industrial sectors signifcantly impacted the absorption of labor in the agricul- tural sector despite increasing exports in the agricultural sector. Based on this scenario, an 8%increase in agricultural exports, a 9.6% decrease in the mining sector and a 4.9% decline in the industrial sector will reduce the labor absorption of 210 thousand people in agricultural sector, higher than any other sector. Te Ministry of Industry (2018) analyzed the impact of the CPO ban in the European Union market on the Indonesian economy using a computable general equilibrium (CGE) model. Te authors simulated two situations of the export ban, namely, the CPO ban causing decreased exports and the CPO ban followed by investment in economic activities downstream of the palm oil sector. In the frst simulation, the ratio between trade and GDP decreased by 0.18%, increased the real wages by 0.26%, maintained the real GDP, decreased the imports by 0.04% and decreased the exports by 0.42%. In the second simulation, the ratio of trade to GDP increased by 0.25%, increased the real wages by 0.7%, increased the real GDP by 0.42%, decreased the imports by 0.15% and increased the exports by 0.17%. In this simulation, the ban on CPO exports had posi- tive efects compared to the former since the increase in investment in the downstream industries of palm oil is assumed to eventually have a positive efect on ratio between trade and GDP as well as GDP and export. Rifn (2011), using the social accounting matrix (SAM), analyzed the impact of palm oil exports to the economic sector, production factor and household. First, the decrease in palm oil exports by Rp 1 will decrease the economic output by Rp 2.27 with the largest decrease in output in the palm oil sector itself, 61.69% of the total decrease. Second, the impact of the decline in exports of palm oil products will have more infuence on labor in rural areas compared to those in urban areas. Last, the decline in exports of palm oil products will also have a greater impact on the land ownership of households in rural areas. From the perspective of the EU, Europe Economics (2014) reported the efects of the EU prohibiting imports of palm oil; these efects can be classifed into three types: GDP efects, employee efects and tax efects. Prohibiting the import of palm oil will impact the resulting rise in demand by the following fgures: the EU’s GDP of 2.7 billion by 5.8 billion, 1.2 billion in tax revenue by 2.66 billion, and 67,000 jobs by 117,000. Several researchers also have analyzed the impact of the import ban such as in the case of European Union ban on imports from Bangladesh in 1997 (Yunus 2009; Alam and Pokrant 2009) and the Russian embargo on several agricultural products in Rifn et al. Economic Structures (2020) 9:26 Page 4 of 13

2014 (Boulanger et al. 2016; Kutlina-Dimitrova 2017). In 1997, the European Union banned shrimp imports from Bangladesh due to infrastructural defciencies and prob- lems related to hygiene standards; the ban lasted for 6 months until the country’s shrimp industry complied with the HACCP (Hazard Analysis of Critical Control Point) (Alam and Pokrant 2009). Te ban resulted in a short-term loss of exports by US$ 25 million and US$ 5 million of long-term costs, while Bangladesh’s compliance with the HACCP gained an additional export value of US$ 18 million in the short term and US$ 35 mil- lion in the long term annually (Yunus 2009). While only the impact on Bangladesh is analyzed, the impact is analyzed on both sides using the CGE approach in the case of the Russian embargo. Te embargo cost to resulted in a high-income loss (€ 3.4 billion) (Boulanger et al. 2016), while other countries, such as those in the EU, the USA, and , sufered only limited losses in aggregate. Tere are, however, two sectors that sufered a two-digit decline, namely, vegetable and fruits as well as other meat and dairy products (Kutlina-Dimitrova 2017). Te objective of this research is to analyze the impact of suspending Indonesian palm oil exports to the EU, so Indonesia can better prepare for and mitigate the efects of the suspension. In addition, this article analyzes the impact on Indonesian economy and not only on the palm oil sector.

2 Research methods To analyze the impact of the import ban, the computable general equilibrium (CGE) method is utilized. According to Oktaviani (2011), the general equilibrium model is a macroeconomic model that integrates micro- and macroeconomics. Te structural model of CGE is built upon the basics of economic theory (microeconomic) in which the behavior of economic agents is explained specifcally and in detail in the form of behav- ioral equations. CGE is able to describe interactions between diferent agents within a country/region and between countries/regions. One of the growing CGE models is the model of Global Trade Analysis Project (GTAP) developed by Purdue University in 1993. Te GTAP model not only has many advan- tages but also has its limitations. Te GTAP model is compiled from national accounting data and input–output tables, showing consistent market interdependence (Hosny 2013; Hosoe et al. 2010). Some of the advantages of the GTAP model are

1. It is a common analytical tool used to analyze problems related to the efects of trade liberalization and price policies in the agricultural sector, therefore, any external shocks (e.g., policy changes or trade accuracy) and the consequences of changes in domestic policy due to the application of the trading rules can be measured quantita- tively. 2. GTAP model can provide appropriate steps and methods for changes in welfare as a result of trade liberalization policies when compared to other methods. Tis model can accurately measure not only changes in aggregate welfare, but also the wel- fare consequences of changes in trade policies in certain sectors. Tis is important because in reality, policymakers may pay more attention to the impact of trade poli- cies on individual sectors and special interest groups rather than their impact on the Rifn et al. Economic Structures (2020) 9:26 Page 5 of 13

Table 1 Summary of sectoral and regional aggregation

No Sectoral 1 Vegetable oil 2 Oil seed 3 Others No Region 1 Indonesia 2 3 4 Colombia 5 Nigeria 6 7 European Union (EU)

overall economy. Tus, in this study, the GTAP model was used to analyze the impact of the policies implemented by the European Union on Indonesian palm products.

Meanwhile the GTAP model also has limitations, including frst, focused on price as the main driving variable and ignored other infuences on economic behavior (Piermartini and Teh 2005). Second, this CGE-GTAP Model only confrms that inten- sive driving trade changes are not taken into account (Schif and Winters 2003). Last is the absence of result validation, which is included in other econometric models, and the market structure is assumed to be in a perfect competition market, making it difcult to perform analysis in imperfect market competition conditions (Oktaviani 2011; Kasan 2011).

2.1 Data Tis study applied the model of the GTAP version 9 approach, in which 140 regions and 57 sectors are already aggregated. Data in GTAP version 9 are the initial equilibrium according to the input–output table of 2004, 2007, and 2011. In line with the objective to observe the suspension of CPO exports from Indonesia to European Union, this study will perform further aggregation based on the required and relevant region and sector. For aggregation based on region, this study will use aggregation data from the region of the European Union as a whole (Indonesian CPO export destination region), as well as the main CPO-producing countries of (1) Indonesia, (2) Malaysia, (3) Tailand, (4) Colombia, (5) Nigeria, and (6) Singapore. Despite the fact that Singapore is not consid- ered a global producer of CPO, it is the largest CPO trader in the world. Meanwhile, the other countries were included in the region labeled rest of world (row). Tis study only focused on the impact of Indonesian CPO export suspension to the European Union (with its 28 member countries), with vegetable oil focused upon as the product discussed in the aggregation. According to the GTAP program, CPO is one of the components in vegetable oil, which thus applies to vegetable oil produced in Indone- sia. Terefore, the aggregation process applied to sectors such as (1) vegetable oil (veg- etable oil and fats) containing CPO, (2) oilseed (oil containing oilseed), and (3) other commodities. A summary of regional and sectoral aggregation is presented in Table 1. Rifn et al. Economic Structures (2020) 9:26 Page 6 of 13

2.2 GTAP model and simulation Te GTAP model is widely used by researchers, academicians, and policymakers to perform empirical analyses on the impact of liberalization and change in trade policy implemented by a country. Te simulation result is used as a reference to observe the impact as well as suggests recommendations toward the policy. In this case, the Euro- pean Union parliament plans to establish trade policy to suspend Indonesian CPO imports in 2021 based on the agreement in the Report on Palm Oil and Deforestation on Rainforest. Even though the decision has not been fnalized, the resolution already contains recommendations toward the palm oil industry. Trough a statement men- tioning rampant corruption in the palm oil industry with respect to child labor, viola- tion of human rights, omission of the rights of indigenous people, and deforestation and habitat damage, the industry is considered to have created a negative impact and be mismanaged. Hertel (1997) mentioned that there are three main components in the GTAP model. First, GTAP is developed based on the regional economy to describe the activity and behavior of economic players (company, consumer, and government). In this compo- nent, interaction between economic players exists through economic activity, both in the form of production and consumption, and the value added. Te existing interac- tion can be observed from the fow of goods and services, as well as the fow of money between economic players/agents. Te second component of the GTAP model framework is the database, which is a component of economic data related to the matrix of bilateral trade, transportation, and protection from the input–output table model and of each country. Terefore, it is possible for the GTAP model to be the most appropriate for applied software to perform various simulations regarding the impact of free trade between countries or regions. Last, the third main component in the GTAP model is behavior which con- sists of four parameters, namely (a) elasticity of substitution (consumption and pro- duction), (b) elasticity of transformation that will determine the level of movement between sectors, (c) fexibility of regional investment allocation from the primary fac- tor, and (d) elasticity of consumer demand. In addition, the model also explains that a policy implemented by a country/region will impact another country/region. GTAP is both a model and software that can be used to analyze many countries. Analysis is done by determining simulation considering the impact of a policy (shock) on indicators from the region or sector which become the focus of analysis. Tere- fore, the main key from this analysis is the determination of the simulation type from the policy to be applied in each analysis. Tis study will apply two scenarios or simulations to analyze the impact of suspend- ing Indonesian CPO exports to the European Union based on macroeconomic and sectoral conditions in Indonesia. Te scenarios used in this study were as follows:

a. Scenario 1 (Simulation 1/SIM1): All European Union (EU) countries ratify (agree on) the suspension of total CPO imports from Indonesia in 2021. In this situation, approximately 17–20% (± 5 million ton CPO) of total CPO exports to European Union will be restricted. Rifn et al. Economic Structures (2020) 9:26 Page 7 of 13

Table 2 Impact of palm oil exports’ stoppage to the European Union based on macroeconomic conditions of (GDP) and welfare level in Indonesia and other palm oil-producing countries No Country Gross domestic product (%) Equivalent variation (US $ Million) SIM1 SIM2 SIM1 SIM2

1 Indonesia 0.00274 0.00138 213.99 107.24 − − − − 2 Malaysia 0.00011 0.00009 10:37 7:35 − − 3 Thailand 0.00044 0.00033 4:06 3:01 4 Singapore 0.00004 0.00005 2.62 1.95 − − − − 5 Colombia 0.00004 0.00003 00:27 00:18 6 Nigeria 0 0 0.32 0.23 − − Description: SIM1: Scenario in which the export of palm oil from Indonesia to the European Union halted 100% SIM2: Scenarios in which the export of palm oil from Indonesia to the European Union halted 50%

b. Scenario 2 (Simulation 2/SIM2): European Union limits the use of palm oil for bio- diesel and 47–50% of EU CPO import from Indonesia is used for biofuel; therefore, it will halt 50% of the total Indonesian CPO import to the European Union.

3 Results and discussion 3.1 The impact of palm oil export stoppage to the European Union based on macroeconomic conditions in Indonesia and several other main palm oil‑producing countries Te GTAP model is an analytical model to analyze the impact of policy changes in trade among countries. Some theories show that international trade is closely related to a country’s economy (Bowen et al. 2001; Cogneau and Robillard 2000). Te initial part of this discussion will look at the impact of palm oil exports’ stoppage to the European Union based on macroeconomic conditions in Indonesia and some of the other main palm oil-producing countries. Te stoppage of Indonesian palm oil products to the European Union will have very little impact on real GDP, welfare level, exports and import value, trade balance and terms of trade. Table 2 shows the impact of the stoppage of Indonesian palm oil exports to the European Union based on macroeconomic indicators, such as economic growth through gross domestic product (GDP) and welfare level. Tis condition indicates that both scenarios show diferent impacts. For Indonesia as the main producer, palm oil exports’ stoppage to the European Union leads to a relatively small decline in real GDP of less than 1% (0.00274 and 0.00138%) for both scenarios of 100% or 50% stop- page of palm oil for nonbiodiesel exports. Tis is consistent with research by the Min- istry of Industry (2018) and the fndings of the previous multiplier analysis. Te study conducted by the Ministry of Industry (2018) focuses on the ban on CPO in the Euro- pean Union accompanied by in the CPO downstream industry. Te authors look at the impact of CPO bans on the domestic CPO industry, and see the relation to CPO substitution into fuel. While this study looks at the impact of the planned termina- tion of CPO exports to the European Union on macroeconomic and sectoral conditions Rifn et al. Economic Structures (2020) 9:26 Page 8 of 13

without limiting the related industries using two scenarios. Te same condition has also been experienced by Malaysia and Singapore. Even though it does not have oil palm plantations, Singapore is known as a trader of palm oil from Indonesia and Malaysia. Te Indonesian palm oil exports’ stoppage to the European Union does not necessarily impact other producer countries (Tailand, Colombia and Nigeria), and this can be seen from the very scant rise in real GDP. Because of this, it is suspected that the European Union does not necessarily divert its palm oil supply from Indonesia to other producer countries. According to experts and palm stakeholders who were interviewed in an FGD conducted by the research team, this happens because the European Union must con- sistently apply the product requirements for palm oil to all producer countries, whereas the conditions of other producer countries are no better than Indonesia and there is still an ‘emotional’ bond in the palm oil-processing industry in Europe which has networks and good relations with palm oil producers in Indonesia. Te next indicator is the welfare level. Indonesia as the main palm oil-producer coun- try in the world shows that palm oil exports’ stoppage, both in SIM1 and SIM2, leads a decline in welfare of US $ 213.99 million and US $ 107.24 million, respectively. Te greatest loss of welfare happens if palm oil exports to the European Union are stopped completely. Indonesia experiences the largest welfare loss among other main producer countries, and even countries such as Malaysia, Tailand and Colombia experienced an increase in welfare, although at a relatively small value. Malaysia experiences slight increase in welfare since the country has more developed and diversifed palm oil prod- ucts which has higher value added compare to Indonesia. With the stoppage of CPO, Malaysia can beneft from producing more value-added products of palm oil. For Indonesia, the welfare level indicator shows that those who experience the impact of the export ban are the community directly involved with oil palm, such as smallhold- ers and large/private plantations, because they will experience a short-term decline in demand and prices. Tis condition will reduce short-term consumption, but in the medium and long term, palm oil stakeholders, especially in industry, will make adjust- ments by seeking new markets outside the European Union or strengthening existing key markets (India and China) and by seeking to strengthen and utilize domestic mar- kets that have not been optimally exploited (biodiesel–bioavtur, cooking oil, and other derivative products).1 Te next macroeconomic indicators discussed are those of export, import, trade balance and terms of trade as presented in Table 3. Indonesia as the main palm oil producer in the world shows that if the palm oil exports’ stoppage to the European Union is fully implemented, then there will be a relatively small impact on total Indo- nesian exports, that is, less than 1% (i.e., 0.128% if exports are stopped completely and 0.06% if the export of palm oil for biodiesel is halved). Tis fnding is the same as the results of a study conducted by the Ministry of Industry (2018) that looks at the impact of the European Union’s import cessation on Indonesian CPO which is used as a biodiesel material. Te study showed that the import and export indica- tors fell by 0.04 and 0.15%, respectively. Te decline in exports is suspected to be due

1 Tis was the conclusion of the interview and FGD with oil palm stakeholders in Pekanbaru, Medan and Pontianak. Rifn et al. Economic Structures (2020) 9:26 Page 9 of 13

Table 3 Impact of stoppage of palm oil exports to the European Union against macroeconomic conditions of export, import, trade balance, and terms of trade in Indonesia and some of the World Major Palm No Countries Export (%) Imports (%) Trade Balance Terms of trade (%) (US $ Million) Sim1 Sim2 Sim1 Sim2 Sim1 Sim2 Sim1 Sim2

1 Indonesia 0.128 0.0641 0.242 0.121 22.37 11.16 0.0950 0.0476 − − − − − − 2 Malaysia 0.006 0.0026 0.014 0.007 6.92 4.89 0.0047 0.0022 − − 3 Thailand 0.001 0.0004 0.003 0.001 1.32 0.66 0.0011 0.0005 − − 4 Singapore 0.001 0.0003 0.002 0.001 1.75 0.99 0.0008 0.0004 − − − − − − − − 5 Colombia 0.001 0.0006 0.001 0.001 0.15 0.06 0.0003 0.0001 6 Nigeria 0.0001 0.0000 0.001 0 0.40 0.18 0.0003 0.0001 − − − − − Description: SIM1: Scenario in which palm oil exports from Indonesia to the European Union are stopped 100% SIM2: Scenario in which the export of palm oil from Indonesia to the European Union is stopped 50%

to, in recent times, palm oil, as it is the largest contributor to the Indonesian export structure. Similarly, palm oil export stoppage to the European Union will impact the decreasing Indonesian total imports from various countries. A higher decline in the total import from Indonesia implicates a positive balance of trade. In Table 3, Indonesian imports, in both the frst (SIM1) and second scenarios (SIM2), experienced a decrease of 0.242 and 0.121%, respectively. Tis shows that, although Indonesia will halt its palm oil exports to the European Union, this will not have a major impact on its national trade performance. It is shown that when com- pared to other top oil-producing countries, Indonesia has a positive trade balance. Tis means that the Indonesian export value is still far greater than the total import value, despite declining Indonesian exports. Tis condition also shows that, through the palm oil export stoppage to the European Union, Indonesia has the greatest ben- efts compared with other palm oil producer countries. Te last macroeconomic indicator discussed is the terms of trade (TOT) which is a comparison of the relative price of goods between two countries (Oktaviani et al. 2010). In addition, TOT also shows the competitiveness of a product or country (Oktaviani et al. 2010). Although Indonesian trade balance has a positive value, the decline in exports and imports indicates the decline in competitiveness of all Indo- nesian products, especially palm oil. Tis is indicated by decreased terms of trade when Indonesian palm oil exports are partially or completely stopped to the Euro- pean Union. Te decline was also not too signifcant (less than 1%) at 0.095% and 0.047% for both scenarios, respectively. Several other countries, such as Malaysia and Tailand, have increased competitiveness, even though they are very small at less than 0.01% for each scenario. Based on the interviews and FGDs conducted in several cities, the European Union’s decision to ban Indonesia has generated momentum to improve and better prepare the Indonesian palm oil industry, especially in terms of fulflling certifcations (RSPO, ISPO, ISCC) and coordinating an impartial policy of oil palm. It is hoped that improvements to national palm oil management will recover the negative image of palm oil for major buyers in the international market. Rifn et al. Economic Structures (2020) 9:26 Page 10 of 13

Table 4 Impact of stoppage of palm oil exports to the European Union based on sectoral conditions in Indonesia No Sectoral indicators Scenario Sim1 Sim2

1 Output 4.79 2.40 − − 2 Land 2.33 1.16 − − 3 Price 0.10 0.04 − − 4 Unskilled labor 4.86 2.43 − − 5 Skilled 4.82 2.38 − − Description: SIM1: Scenario in which palm oil exports from Indonesia to the European Union are stopped 100% SIM2: Scenario in which the export of palm oil from Indonesia to the European Union is stopped 50%

3.2 Impact of palm oil export stoppage to the European Union based on the sectoral condition in Indonesia Palm oil export stoppage to European Union will have relatively small impact on out- put, land use, prices and employment. Table 4 provides information on the impact of palm oil export stoppage to the European Union based on the sectoral indicators in Indonesia. Te indicators used are output from CPO, domestic prices, land use, and labor absorption (skilled and unskilled). It has been theoretically shown that trade restrictions will have a negative impact on countries that implement them (Bowen et al. 2001). Te European Union plan to sanction Indonesia to halt imports from 2020 is due to the reasons mentioned by the parliament of the European Union in that palm oil is largely problematic with respect to the issues of corruption, child labor, violation of human rights, omission of the rights of indigenous people, and defor- estation and habitat damage. Tis statement is found in the Report on Palm Oil and Deforestation on Rainforest and will implicate sectoral conditions particularly within the palm oil industry in Indonesia. Te output and land indicator are changes due to the impact of Indonesian palm oil export stoppage to the European Union. If palm oil exports are stopped completely, palm oil output, such as palm oil and its derivatives, only decreases by 4.79 and 2.40% for each scenario, respectively. Tis condition shows that the industry will adjust its production (reduce its production) in the short term, while in the long term it will be readjusted by trying to fnd new markets, the use of the domestic market and utilization of the domes- tic downstream sector. Te implication of reducing output is the fall of oil palm land use, but this needs to be noted that oil palm is an annual crop that is not easily replaced or converted to other crops. Based on the two scenarios, there will be a reduction in land use of 2.33 and 1.16%, respectively. In addition, the efect of palm oil export stoppage to the domestic price is negli- gible, indicated by the value of 0.1 and 0.04% obtained for each scenario, respectively. While there was a price adjustment, it was only temporary, and thus the transmission of price changes was relatively insignifcant. It could be seen that the domestic price only decreased by 0.1%; however, based on the focus group discussion (FGD) and discussions, price changes were very sensitive. A very small price change can be directly transmitted to the price of palm oil input, such as fresh fruit bunches (FFBs) at the farm level (Susila Rifn et al. Economic Structures (2020) 9:26 Page 11 of 13

2004). In this condition, it is necessary to anticipate unfavorable price changes at the farmer level as the afected party. Another indicator that needs to be considered as a result of the Indonesian palm oil export stoppage is employment. Based on the scenarios and the general equilibrium eco- nomic model and software of GTAP version 9, there is a decrease in employment within the palm oil industry in Indonesia. Tis is seen from the absorption of both skilled labor (professional sector) and unskilled (plantation and other informal labor in the palm oil industry) labor, who both experienced an average decline of 4.8%. Similar results were also generated from the simulation of 50% palm oil export stoppage. Tis condition is expected due to the short-term adjustments in output, thus the use of labor in the indus- try should be rationalized. Te same outcome was also found in smallholder plantations wherein the owners themselves harvest the oil palm, work that was previously per- formed by labor outside the household. However, this condition will not be a long-term result, since the industry will adjust the non-exported output to be further processed and absorbed by the domestic market.

4 Conclusion Tere were no signifcant impacts found in the suspension of palm oil exports on Indo- nesia’s macroconditions. Tere is no signifcant ban on Indonesian CPO imports by the European Union, alleging that the contribution of Indonesia’s CPO exports to the Euro- pean Union is only 14% of total CPO exports (2017). So that EU policies to stop CPO imports from Indonesia have not had a signifcant impact on macroconditions. Moreo- ver, in terms of sectoral indicators such as output, land use, and labor absorption, there were nonsignifcant impacts. Terefore, the European Union’s suspension of palm oil exports by the will, in general, not generate negative impacts on the national and sectoral economy of Indonesian palm oil industry.

Abbreviations CGE: Computable general equilibrium; CPO: Crude palm oil; EU: European Union; FFB: Fresh fruit bunch; FGD: Focus group discussion; GTAP: Global trade analysis project; HACCP: Hazard analysis of critical control point; ISCC: International sustainability and carbon certifcation; ISPO: Indonesian sustainable palm oil; RED: Renewable energy directive; RSPO: Roundtable on sustainable palm oil; SAM: Social accounting matrix; SDGs: Sustainable development goals; TOT: Terms of trade; UN: Comtrade United Nations International Trade Statistics Database. Acknowledgements The authors express their gratitude to Mr. Mahendra Siregar and Mr. Iman Fakhrudin from CPOPC (Council of Palm Oil Producing Countries) for the funding and also for the participation of scholars in the focus group discussion (FGD) in Bogor, Medan, Pekan Baru and Pontianak, Indonesia. Lastly to Ms. Syarifah Amaliah for the calculation of the CGE model. Authors’ contributions All authors have contributed equally to designing the research, the process of data collection and calculation, and draft- ing and revision of the manuscript. All authors have read and approved the fnal manuscript. Funding This research is supported by the funding from CPOPC (Council of Palm Oil Producing Countries). Availability of data and materials Various sources were used to collect data for the analysis. Each source of data and materials is available and referred to in the paper, where appropriate. Ethics approval and consent to participate Not applicable. Consent for publication Not applicable. Rifn et al. Economic Structures (2020) 9:26 Page 12 of 13

Competing interests The authors declare that they have no competing interests.

Received: 7 February 2019 Revised: 26 July 2019 Accepted: 26 March 2020

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